KARACHI - The State Bank of Pakistan (SBP) has issued detailed instructions for Profit & Loss Distribution and Pool Management in Islamic Banking Institutions (IBIs) in order to improve transparency and disclosures and bring standardisation in IBIs’ profit and loss distribution policies and practices.
With the issuance of these instructions, which are applicable with immediate effect, Para IV of annexure-II of IBD Circular No. 2 of 2008 stands withdrawn. Further, the provisions of BPRD Circular No 7 of 2008 regarding minimum rate of return on savings deposits as amended from time to time shall no more be applicable on Islamic Banking Institutions.
Failure to comply with SBP instructions shall invoke penal action under the provisions of Banking Companies Ordinance, 1962, says IBD Circular No.3 of 2012 issued to the Presidents/Chief Executives of all Islamic banks and all conventional banks having Islamic banking branches today.
It may be pointed out that the peculiar nature of relationship between the depositors and Islamic banking institutions (IBIs) where income earned by the IBI has a direct impact on depositors’ return; there was a need for Islamic banking industry to have well defined, transparent and standardised policies and practices for profit & loss computation and distribution.
As per SBP instructions, each pool of deposit established by IBIs would act like a virtual enterprise having explicitly demarcated sources of funds, ownership of specific assets and income and expenses. The profit earned on the financing and investments made through such pool of deposits will be shared between IBIs and the depositors as per pre-agreed profit sharing ratio. In case of loss, the same will be borne by the depositors in proportion of their investments unless caused by the negligence and misconduct by the IBIs in managing the depositors’ funds.